TriMas Corporation Q2 2008 Earnings Call Transcript

Jul.31.08 | About: TriMas Corporation (TRS)

TriMas Corporation (NASDAQ:TRS)

Q2 2008 Earnings Call

July 31, 2008 10:00 am ET

Executives

Grant Beard - President and Chief Executive Officer

Mark Zeffiro - Chief Financial Officer

Bob Zalupski - Vice President of Finance

Sherry Lauderback - Vice President, Investor Relations

Analysts

Curt Woodworth - J.P. Morgan

Thomas Klamka - Credit Suisse

Steve Barger - KeyBanc Capital Markets

Robert Schenosky - Jefferies & Company

Alan Weber - Robotti & Company

Operator

Welcome to your TriMas second quarter 2008 earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference call, Sherry Lauderback.

Sherry Lauderback

Welcome to the TriMas Corporation's second quarter 2008 earnings call. Our President and CEO, Grant Beard, and our Chief Financial Officer Mark Zeffiro will review TriMas' first quarter results in addition to providing the company's outlook into the remainder of 2008. After our prepared remarks, we will answer questions from the audience. Also present with us today from TriMas is Bob Zalupski, Vice President of Finance.

To facilitate this review of our results, we’ve provided a press release and a power point presentation on our Company Website, trimascorp.com under the investor section. In addition, a replay of this call will be available later today by calling 866-837-8032 with a reservation number of 1267252.

Before we get started, I'd like to remind everyone that our comments today, which are intended to supplement your understanding of TriMas, may contain forward-looking statements that are inherently subject to uncertainties. We caution everyone to be guided in their analysis of TriMas by referring to our Form 10-K and Form 10-Q for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements.

Also, we undertake no obligation to publicly update or revise any forward-looking statements except those required by law. We would also direct your attention to our website, where considerably more information may be found.

At this point, I'd like to turn the call over to Grant Beard, TriMas President and CEO.

Grant Beard

This morning, Mark Zeffiro, our new CFO and I will review our second quarter 2008 results and our segment highlights for the quarter.

TriMas and I are very pleased to halve Mark on our team. He brings a tremendous amount of operationally oriented financial management experience to our team. Mark has held Senior Executive positions at General Electric, First Quality Enterprises and Black & Decker. Together we will also provide a financial overview of our company as of the June 30 2008 and discuss the company’s outlook for the reminder of the year. After our formal comments are complete we will open up the forum for question and answers.

With the completion of our second quarter TriMas Corporation is pleased that our strategic growth and cost initiatives are both showing progress. Our company delivered solid performance within the second quarter by meeting our earning expectations in a difficult economic environment. Our strategic growth priorities which are focused on the end markets of energy, aerospace, medical, pharmaceutical and specialty packaging continue to transition our overall portfolio.

TriMas saw a 10.8% revenue growth from our Packaging, Energy and Industrial Specialty Groups within the quarter. This revenue growth was also augmented by our international initiatives that allow TriMas to grow by 13% within the quarter outside the United States. This positive performance continues to be partially offset by the consumer recession within the United States and our exposure to discretionary spending within the RV Trailer Products and Recreational Accessories segments we collectively call Cequent.

While TriMas grew at an overall rate of 3.3% for the quarter, our two groups known as Cequent, saw revenues decline by 5%. This performance was against an overall end market that was down by approximately 15% to 20% in comparison to last year. Our new product, market expansion and bundling initiatives continue to allow TriMas to outperform in these end served markets. TriMas is a preeminent market leader in the towing, trailer and cargo management product categories and we continue to leverage our brands and channel positions to drive relative revenue performance.

As most of you are aware the overall economic climate in the United States remains weak. We believe the consumer is in a recession. We expected our sequence served markets to be challenged as we entered 2008 by being down 10% over 2007. Those end markets have been down approximately 15% to 20% for the first six months of 2008 and we see no improvement for the remainder of the year.

That said, we believe our product, bundling, pricing and cost management initiatives will continue to drive above market performance for Cequent. In addition and as an offset to our consumer discretionary spend exposure we are seeing record backlogs in our aerospace and energy businesses and tremendous support for our specialty packaging and medical product initiatives.

TriMas has never had more opportunities in front of it as a company than it does at present. These are however uncertain times of demand our company to balance our growth initiatives with cost management. We remain committed to an aggressive cost management environment that is founded on the disciplines of lien and that will continue to drive both managerial as well as operational leverage within our company.

During the second quarter, we took incremental action to reduce costs by $3 million in annualized cost reductions at headquarters levels. The actions in the second quarter resulted in $0.04 per share charge that netted an EPS from continuing operations of $0.28 per share for the quarter. These restructuring initiatives in the second quarter streamlined our leadership structure in decision-making. These changes were made possible by prior investments made into our business units.

TriMas has a great grouping of companies within its portfolio. Our business model is intact and our fundamentals continue to strengthen despite current economic conditions. Our people are talented and motivated and our companies have embraced initiatives that support both lien and growth. We believe this is evidenced within the statistics of the second quarter.

TriMas’s revenue was up 3.3% in the quarter. This included an increase of 10.8% from our packaging, energy, industrial specialty segments collectively and a decline of our Cequent businesses of 5% within the quarter. Our adjusted EBITDA was $39.4 million during the quarter. Our company continues to see revenue and earnings growth from our strategic priorities.

Although our Cequent accessory businesses are often sighted as an earnings risk to TriMas, it is important to note that only 27% of the company’s operating segment EBITDA in the second quarter was from the Cequent companies, which is also the level we expect for the reminder of the year. Well our EPS excluding special items was down from $0.37 per share in the second quarter of ’07 to $0.32 per share in the second quarter of ’08; our net income excluding these items was up 12.8% in the quarter to $10.8 million.

Our cash flow improved by $14.6 million with all operating segments producing positive cash flow. At the same time, our debt was down over $21 million with the company having over $143 million of availability and $7 million in cash at quarter end. This performance was inline with our expectation and supports the balance of initiatives being implemented across TriMas.

Now, let’s look at each of our reporting segments starting with our Packaging Systems Group on slide eight. Packaging Systems saw modest revenue growth in the quarter with its industrial closure and specialty dispensing product lines being up and its commercial construction products being down as compared to the second quarter of ’07.

Strategically, we continue to transition the group, to have more exposure in the growth markets such as food, beverage, pharmaceutical and medical which overtime will moderate the group’s exposure to the cyclical industries such as construction. We expect modest growth within the group to continue with results being moderated by our product exposure to the United States commercial construction market.

Our earnings performance was directly impacted in the quarter by volume declines from the commercial construction market and the associated under absorption of fixed costs which resulted. In addition, the group also continued its investment into international expansion initiatives for its core specialty dispensing and closure product lines. We believe this focus will drive long-term growth in both revenues and earnings.

Within our next group, Energy Products, we saw very sold revenue growth of 29.7% over the second quarter of ’07. This was driven by strong demand, new products and market expansion. Our new compression in gas equipment product offerings are being well received in the market. We also currently have a record backlog for our engine product lines. Our strategy of expanding our well-site content is being implemented and is exceeding our expectations. The group’s earnings in the quarter also showed good conversion with adjusted EBITDA being up 46.8%.

Our Lamons Gasket business continues to implement its international expansion plan with the support of majors such as Exxon Mobile. To support these global customers Lamons will expand operations to include Europe and Asia by year-end. Our businesses within this group expect continued strength within their served markets.

Our Food segment, industrial specialties had revenue growth of 6.4% and adjusted EBITDA growth of 4.9% as compared to the second quarter of ’07. Our growth was moderated by the overall economic climate in the United States and Europe for basic industrial products in our indirect exposure to the transportation markets with our cutting tool and fitting products. The offsetting influence in the group is the continuation of a strengthening order backlog for our aerospace fastener product lines.

In addition, our specialty cylinder business continues to gain market share in Europe, Africa and South America and had record sales in the quarter. Both these groups are experiencing increased international sales growth. The segment's product expansion initiatives in the medical components also continue to progress during the quarter. This group expects continued growth.

Our full segment RV & Trailer Products saw its revenues fall 6.3% as compared to the second quarter of ’07. Earnings for the group were directly impacted by product mix, volumes and associated under absorption of fixed costs. This group continues to migrate its activities to low cost environments and will increasingly leverage our own assets in both Mexico and Southeast Asia. This group has both the opportunity and the intension to further reduce its fixed costs footprint in North America.

As the group continues its implementation of cost initiatives, it will also continue to leverage its great brands and market positions. While its end served markets remain weak in the United States, the group’s initiatives in Southeast Asia, Australia and Canada are producing growth. We expect this group to continue to outperform its served markets in the United States and experience growth in new markets such as Thailand.

Our last group, Recreational Accessories saw its revenues declined 4.1% and adjusted EBITDA declined by 8.5%. Again this group outperformed against the market down by 15% to 20%. The EBITDA conversion in the second quarter was much better than the first quarter due to prior cost initiatives. This group will continue to attack its served markets, expand internationally and reduce fixed costs where appropriate. The outlook for this group is the same as RV & Trailer Products.

Weak United States market with opportunities for market share production expansion and international growth. Both of these groups known as Cequent will continue to drive down cost and aggressively pursue market opportunities. We believe that these businesses will be ideally positioned for the eventual, cyclical recovery and in the shot-term will outperform their served markets and provide cash for TriMas.

Our company as you can see remains a tale of two cities. The good news is that almost 80% of our earnings is being generated from businesses with strong growing end markets and the opportunity for international expansion. Simultaneously, we will drive our Cequent business through this cyclical bottom with the expectations that they improve their business in cost position so as to benefit TriMas when the end served markets recovered. These are good businesses supported by great brands with the reputation for excellence.

We also believe our strategies for growth across the remaining portfolio will serve as a foundation for earnings expansion for the reminder of 2008 and beyond. Our priory of focus remains on increasing our portfolios exposure to the end markets of medical, energy, aerospace and specialty packaging. TriMas’s businesses will continue to produce cash, steadily strengthen our balance sheet and be aggressive.

At this point I would like to hand the call over to Mark, to take our listeners through our financial review.

Mark Zeffiro

I will begin my comments referencing page 14 of the slide presentation. First, let’s consider our results for the quarter. We delivered record quarterly sales of $297 million, a 3.3 increase versus a year ago. A key contributor to this increase was the exceptional performance of our energy product segment with growth of 29.6% or $12 million in the quarter.

This was offset by declines in the RV & Trailer and Recreational Accessory segments, which collectively were down 5% or $7 million in the quarter. We also benefited from the acquisition of DEW Technologies in Q3 2007, which for the quarter contributed $2 million in sales. Lastly, the favorable effects of foreign currency exchange contributed approximately 1.4% of the sales in the quarter.

Gross margin percentages declined in the quarter by 120 basis points driven by a demand softness and mix. During the quarter we continued efforts to right size our inventory for anticipated markets for the reminder of the year. Our significant reduction in output has contributed to the gross margin rate decline to reduce overhead absorption for the quarter and year-to-date. While we experience the positive result of our pricing efforts relative to the inflationary trends, we have not recovered all the relating cost increases.

During the quarter our SG&A spending increased by $3.5 million compared to the prior period. This was driven predominantly by the $2.3 million in restructuring actions taken in Q2 and a continued investment in growth initiatives of the businesses, most notably packaging, energy and aerospace.

Excluding cost of the restructuring charges taken in Q2, the SG&A percentage of sales was slightly down at 15.7% versus 15.8% in 2007. This performance still represents an increase in spending of $1.2 million as a result of our investments in regional end product growth.

Continuing to move down the income statement, interest expense decreased by $4.5 million in the quarter; $2.5 million of this reduction relates to IPO proceeds used to retire portion of the senior notes. Our weighted average cost of bank borrowings with 5.2% versus last year of 8.1%, which resulted in an additional $2.1 million in savings. This decline also represented a sequential decrease of 80 basis point versus Q1 2008. During the quarter our effective tax rate was 36%.

On a year-to-date basis our sale of $577 million represented a modest increase of 0.8% versus the first six months of 2007. The dynamics for the year-to-date are similar to the quarter with the energy products and industrial specialty segments contributing to the growth of the company, but largely offset by declines in the RV & Trailer and Recreational Accessories segments.

Our packaging system segment showed a modest increase of 1.4% supported by the growth initiatives and our packaging product businesses offset by softened sales in the laminate and the installation products. Foreign currency exchange benefit contributed approximately $8.4 million of the sales increase versus 2007.

For the first six months of 2008, gross margin percentages were at 26.4%, which represents 120 basis point decline compared to the same period of last year. The drivers of this increase are consistent with my comments for Q2. We have already sized the inventory levels with our expected go forward market conditions. In the back half of the year we anticipate increasing levels of material inflation, which will be offset by our pricing initiatives.

For the six month period our SG&A performance is consistent with my quarterly commentary. SG&A as a percent of sales excluding the effect of the restructuring activities remains consistent year-on-year. Turning to slide 15, our reported diluted earnings per share was $0.28 for the quarter and $0.51 year-to-date versus 2007 Q2 loss of $0.15 per share and earnings of $0.16 per share for the first six months of 2007.

Our relative EPS performance for the quarter, if one were to exclude the effects of the current restructuring and the effects of the IPO in May of 2007 would have been $0.32 versus $0.37 in the second quarter of 2007. This reduction is primarily the result of sales declines in certain markets, the impact of cost reduction initiative including overhead absorption related to reduced production and imbursements in growth initiatives. As a result of these efforts, we expect to see better overall sales and EBITDA conversion for the remainder of 2008 as compared to the front half of 2008.

As for the balance sheet on slide 16, I’ll discuss a few highlighted accounts for the business. Accounts receivables growth remains consistent with our performance of 2007. The relative performance in DSO was more than a three day reduction versus a year ago. As for inventory we have reduced our investment from year end by $4 million and a sequential reduction of $7 million from the prior quarter end. Keep in mind that these reductions occurred during a period in which the business normally builds inventory.

We’ve also funded the inventory needs for new product launches, Asia supply chain efforts and regional growth requirements. Yes, we do have $16 million more in inventory than a year ago, but approximately $9 million of this increase is due to inflation. We have more work to do in this area and we’ll continue to focus time and effort around purchasing efficiency and gross inventory management.

Our focus on purchasing has also led to better overall performance for the business. We will continue to manage vendor relationships in order to maximize the economics of price in terms. Working capital remains a focused for the executive team.

Moving on to slide 18 which details our capital position; our total indebtedness as of June 30, 2008 was $649 million which represents a reduction of more than $23 million compared to March 31, 2008. This reduction was a result of solid cash generation by our operations and continued focus on both working capital management and capital rationalization. In addition each of our segments delivered positive cash from operations in 2008.

Lastly, we ended the quarter with nearly $144 million of available liquidity under our revolving credit and securitization facilities and nearly $7 million in cash. We ended the second quarter with a significant cushion relative to our financial covenants. Our financial performance as of June 30, 2008 resulted in interest coverage and leverage ratios of 2.54 and 4.25 respectively, as compared to our covenant requirements of 1.9 and 5.25.

We are particularly pleased with our cash flow from operations for the quarter. If we were to look at the underlying performance, that’s to say exclude the effects of the accounts receivable securitization, which by its nature is more of a financing activity and the impacts related to the IPO, debt extinguishment and restructuring, one would see a recurring cash from operations of $27 million versus $7 million in a year ago period.

As we look forward through the rest of the year, we have our forecast in place that is balanced in terms of risks and opportunity. We continue to feed our growing businesses and look for share and market expansion opportunities. Price actions continue to offset material inflation. Also we will continue to drive cost curtailment and reductions where needed. These efforts will continue to protect us in the near-term versus our exposures to end markets with underlying softness, most notably the RV related and commercial construction.

We will continue to monitor our businesses in Europe for any indication of market stay down. As for our back half performance, we see continued growth in our Energy and Industrial Specialty segments. These increases in sales combined with continued growth efforts in the packaging segment will lead our sales growth in the back half of 2008.

Our forecast assumes that the RV & Trailer and Recreational Accessories end markets will remain weak during the second half of 2008. Also we will continue to aggressively manage costs and working capital in all businesses, but particularly in those two segments.

Our full-year outlook for EPS from continuing operations remains at $0.85 to $0.95. This guidance excludes costs related to one-time charges for restructuring activities. As you know we incurred about $2 million or roughly $0.04 a share in Q2 as part of our efforts to streamline the organization and improve the company’s cost position.

For the remainder of 2008, we will continue to be prudent with our capital, pay increased attention to return on net operating assets in the business. This will help us during the year and beyond through better capital prioritization. We will maintain our focus on relative health of our balance sheet with continued scrutiny of working capital and more specifically inventory needs. With continued inflationary pressures, we will continue to act commercially to offset these costs.

Lastly, while our focus on cost reduction continues we will also look forward to reimbursement alternatives to support our growth efforts. At this point, I would like to turn the call over to the operator to open the line for questions. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Curt Woodworth with J.P. Morgan.

Curt Woodworth - J.P. Morgan

Just wanted to drilldown on the packaging segment margins and Rieke I thought had very high incremental margins of least, call it maybe 30% and with that business up 7% you should see pretty good incremental EBIT growth, yet you were down about $1.6 million and it just seems like Compact would have had to be down 40% to 50% to get those numbers, so if you can just kind of walk me through the moving pieces on the operating profit line of packaging this quarter, that would be very helpful?

Grant Beard

Curt, with respect to the Rieke businesses, there is a few things that moved within the quarter and that is the price actions have been announced and as such they will be more effective in the back half of the year. So, part of that negative regress as you may call it, is indeed related to some of the inflationary activities that we’re seeing the business.

Your point towards the compact business with respect to significant reductions really points to two things; one, how much of that business is really related to the commercial construction segment, which I’m not prepared to comment to at this point in time, but it is down sizably in that respect. The ability of that management team to takeout costs and commensurate it with the sales decline has been proven difficult but it is underway.

Curt Woodworth - J.P. Morgan

Okay and is it still about a 70/30 split between the two?

Mark Zeffiro

Yes, that’s close.

Curt Woodworth - J.P. Morgan

Okay and you mentioned incremental growth expense also has somewhat of a drag. What was that number incremental year-on-year?

Mark Zeffiro

Curt to that end, within the SG&A structure of Rieke, there were incremental hedge added for the growth initiatives of the business. The exact number I can get back to you if you’d like, but it’s relative to a couple of heads that are focused on market development activities.

Curt Woodworth - J.P. Morgan

So going forward do you think that the current sort of run rate of margin at packaging, is that a better forecast assumption to you or on the 16%, 59?

Mark Zeffiro

With respect to the forecast, I’m not ready to comment towards the changes in the back half, but the current margin run rates are a good indicator for future expectations.

Grant Beard

Right and we have always been able and continue to expect that our pricing initiatives that are in place at the back-end of the second quarter will in fact be held, we have no indication that they are not. It took a little bit longer in Europe to sort of get into the market and get through -- in a sense, those negotiations. I think you’re looking at it correctly and conservatively.

Curt Woodworth - J.P. Morgan

And then in terms of the Rieke growth, how much of that was driven by success within the new specialty dispensing products as opposed to the core closure business.

Grant Beard

I think that our expectations for sort of the new specialty dispensing will be low double-digits, that’s what we’ve seen to date, that’s what we saw last year and I think that regretfully is being hidden a little bit by really the industrial part of the business, sort of being flat and the construction exposure being down, but we are very pleased with the transition that’s happening within packaging and are seeing great acceptance for our initiatives, but not just here, but in Europe as well.

Curt Woodworth - J.P. Morgan

Okay, great and on RV & Trailer, I guess also Recreational Accessories, hypostatically if we were to look out at 2009 and make the assumption that you were getting mid single-digits volume growth, what kind of incremental margin do you think you would get on those businesses given all the cost reduction efforts you’ve made to date?

Grant Beard

Well, we are not quite ready to provide 2009 guidance, but I do think that the …

Curt Woodworth - J.P. Morgan

No, I’m just saying hypostatically.

Grant Beard

I think the efforts of cost initiatives; products expansion and cost reduction will yield a benefit to us normally in a rising volume environment, but in a flat environment.

Mark Zeffiro

Curt to take you a little bit further on that, you’d expect to see with some of the efforts in terms of cost reductions within that segment help the general lead through with respect to volume actually coming through versus the negative leverage you’ve seen year-to-date.

Operator

Our next question comes from Thom Klamka with Credit Suisse.

Thomas Klamka - Credit Suisse

Can you talk about the negative operating leverage in RVT was much greater then in Rec Accessories; how much of it’s from outsourcing? Can you talk about that?

Grant Beard

Sure Tom. I think, what you saw in RVT is what we saw in Rec Accessories in the first quarter. I think the drawdown of inventory, the fighting your way through drawing down activities and plans takes a little bit of time and we sort of fought through some under absorption within that group predominantly here in the United States.

I think those initiatives that we’re doing, the continued migration, the lowering of activity levels will show itself and we would not expect such negative conversion as we walk across the year, just like you saw in Rec Accessories sort of a big negative conversion in the first quarter as our initiatives and the accounting of those initiatives sort of catch up. You saw that gap narrow in the second quarter and then ultimately you would expect it to be positively beneficial as you go forward. So, it’s really a timing of initiatives versus any structural issues.

Thomas Klamka - Credit Suisse

Okay and when you look at the increase in inventories at the corporate level, is it primarily in these two businesses?

Mark Zeffiro

If you look at inventories Tom, on a total corporate basis you did see increases to support some of the growth related businesses specifically in the case of our aerospace related activities as well as the Energy segments, but you also did indeed see increases here in the RVT and RIT segments.

Thomas Klamka - Credit Suisse

Okay and when you look at it the declines here in revenues are frankly not that bad, especially considering what the market did; what do you attribute that to and what do distributor inventories look like and retail inventories?

Grant Beard

Specifically Tom to the Cequent businesses or sort if in general?

Thomas Klamka - Credit Suisse

I think in Cequent you’re kind of down 5% and the markets down 10% to 15%, so where did that out performance come from and it’s part of that kind of loading the channel?

Grant Beard

No, no absolutely not. I think it’s really a combination of a couple things. I think we are really getting the benefit of who we are and the quality of what our products stand for on a service level, so I do think we are taking incremental share; we’ve been very aggressive with getting sort of horizontal development in our product offerings or expanding content into the channels that we are selling and we are getting a growth outside of the United States which is also added.

I would say that the channel inventories sort of in the two step channels; the wholesale distributors are fairly moderate right now, that’s a good thing; they are not overly stopped. I would say that the inventory levels at the finished good dealer, the RV guy are reasonably full right now and you have seen those OE companies really bring down their production.

So, we are getting much more cold if you will in the aftermarket and we’re selling regretfully more accessories right now than we are custom fit products that would go into a new product of sales. So, we are getting a little bit of margin pressure because just of what we are selling isn’t at the top end of our offering, but sort of the idea that if you own something you’re going to buy complementary accessories to something you already own. So, we are seeing that end of our business hold up much, much stronger than where we sell, even when it is an aftermarket sell it’s being driven by a new product purchase.

Thomas Klamka - Credit Suisse

And what’s happening price wise; are you able to recover some of the steel costs?

Grant Beard

Yes, so far so good. So, we’ve been able to in a sense set pricing and we expect that we’ll be able to do that really across our portfolio. It will mathematically put a little pressure on our gross margins, but I think on a absolute cash standpoint, we think we can stay neutral.

Mark Zeffiro

Tom, to add a little more color there, if you are to look the relative material cost inflation on a year-to-date basis as compared to our price related activities, those in essence have offset on a dollars basis, our forecast considers that as well.

Thomas Klamka - Credit Suisse

Okay and you had steel contracts, didn’t you?

Grant Beard

Yes.

Thomas Klamka - Credit Suisse

You locked in pricing and when did those run out?

Grant Beard

We were basically out for the most parts spot buying as we speak and we’ve been able to set our pricing to match the commensurate material moves that we’ve seen in steel and in other materials.

Mark Zeffiro

And to add to that Tom, we’ve taken a bit of prehensile look as we’ve seen those spots, the requirement of us to go to more of a spot buy. We’ve actually anticipated part of those actions within our price activities.

Operator

Our next question comes with Steve Barger with KeyBanc Capital.

Steve Barger - KeyBanc Capital Markets

I had to hop off for a second, so tell me if you already talked about this, but the Recreational Accessory operating margin, 8.1% was a sequential double and I know there were some pricing action in the quarter, but can you tell me what really drove that; was it all pricing or was it cost takeouts and then maybe talk about 3Q and 4Q from a pricing standpoint.

Grant Beard

Yes, I think in Recreational Accessories you saw the pressure of under absorption and us taking activity levels down in the first quarter and I think you are seeing the benefit of those actions in the second quarter. So, it is more internal management initiatives than it was pricing and we expect from a pricing prospective, this is really true, not just at our aftermarket businesses but really across the portfolio. It will basically match the pricing or the material inflation that we see in resin and in steel and our pricing really across the portfolio has stock and we expect it to continue there.

Steve Barger - KeyBanc Capital Markets

So, if activity level or volumes stay where they are right now, then that would imply that this margin level is sustainable through the back half of the year given that it’s more a function of you taking cost down.

Grant Beard

Yes, I think that’s a fair assumption. I mean as we continue to pass through material the relative cash may stay the same and the relative margin might come down a little bit just mathematically because we are passing through.

Steve Barger - KeyBanc Capital Markets

Yes I get that, but the levels; I mean generally speaking the magnitude of margin that you’re seeing right now is achievable at these volume levels for the back half.

Mark Zeffiro

That’s correct.

Steve Barger - KeyBanc Capital Markets

Okay. And are you seeing more of a drop off in products at the high end or the low end.

Grant Beard

Absolutely at the high end and we saw this really all the way through ’07 and we expected it to continue in ’08 and it really has and as I said momentarily a little bit ago, we are really selling into the accessory aftermarket, the replacement type of products, really to the guy or girl that already owns something and the product that is custom fit, that’s really being driven by new installation against the new purchase, that was down in ’07 and it continues to be down in ’08 and that frankly has put a lot of margin pressure on us, our custom fit stuff is much, much more profitable than our core accessory lines.

Mark Zeffiro

Steve, if I was able to back you up a little second on the margin discussion, obviously with the cyclical nature of the business and the natural runoff of volume towards Q4 you’re not going to see the same rate in terms of total operating profit range here because there is a degree of fixed cost leverage yet in the businesses.

Steve Barger - KeyBanc Capital Markets

Right, I get that. I probably get it by saying at current levels.

Mark Zeffiro

I just want to make sure that that was clear.

Steve Barger - KeyBanc Capital Markets

Okay. You’ve talked a lot in the past about how you’ve taking a lot of your production facilities outside of North America or to Mexico at least and certainly to China. Can you talk about the economics of shipping metal hedges and some of the other products from China right now relative to the VAT tax, what Yuan is doing, rising freight costs and that sort of thing?

Grant Beard

Sure, the vast majority of what we’ve taken to Southeast Asia and then in turn we’re bringing it back to the United States have really been components; some finished goods in the world of lighting and what not and clearly we have seen inflation in terms of steel VAT taxes and overall labor, but then inflation is not making VAT activity any economically different or less attractive than its comparable economics in the United States or some other more high cost environment.

So, for us yes, the costs have gone up but we’ve been able to pass those through in our pricing. What we are finding however that in our lower volume higher SKUs, but lower volume type products we probably will not take those to Southeast Asia but we’ll take those into our Mexican assets because we can get just better leverage on logistics cost. So while labor may cost just a little bit more we get a benefit on shipping because of the freight costs.

Steve Barger - KeyBanc Capital Markets

I understand. One quick question about the Energy segment; natural gas prices are off quite a bit in the third quarter, are you seeing that impact orders for the well ahead products yet?

Grant Beard

Not at all; we have a record backlog and our activities continue to firm up, some of that is our new product expansion, but we believe the cross over of capital, what drives capital spend is way, way below where we currently are at now.

Steve Barger - KeyBanc Capital Markets

Okay and last one, Mark, you’ve been there for a few months now. What’s the biggest opportunity you can focus on for improvement and maybe can you talk just about some of the general impressions about how you’re going to tackle the job here?

Mark Zeffiro

Good question, Steve. Really two things that stick out for me is we’ve got a significant amount of fixed cost infrastructure for the company, specifically in our heavier metal bending segments and as such we’ve got to really address that. There is a need to variablize that infrastructure and to the greatest degree do a little bit of labor trading between the differences in rates.

The other thing that I think is critical for us to addresses is that is the focus on working capital, more specifically inventory and those are clearly opportunities for us on a go forward basis. We’re focused on that, focused on the efficiency side of it, but most importantly I think one of the things that we can’t lose track of is we are not just a grinder business; in the sense of just making things more and only more efficiently. We are also about expanding our market presence and also growing globally.

I’d like to see us have a bigger footprint overtime from a global prospective and that will come in the form of not only U.S. shipments outside our domestic orders, but also physical footprint outside the U.S. Those would be the three, Steve that are critical I think for the organization over the next 36 months.

Steve Barger - KeyBanc Capital Markets

Now are those things concurrent or will they occur in the order in which you talked about them?

Mark Zeffiro

No management team can only do one thing at a time. I don’t mean to make light of it, we need to be able to do those things consecutively and concurrently.

Operator

Our next question comes from Robert Schenosky with Jefferies.

Robert Schenosky - Jefferies & Company

A couple of questions here; the first one is, I may have missed it, but what was the revenue benefit in dollars from FX as well as operating income benefit?

Mark Zeffiro

Within the quarter, Robert could you narrow your question a bit, are you talking about the quarter or year-to-date?

Robert Schenosky - Jefferies & Company

I’m sorry, quarter only.

Mark Zeffiro

For the quarter on the top-line Robert its $4 million and the operating income equivalent was about $0.5 million bucks.

Robert Schenosky - Jefferies & Company

Okay great. Also can you offer any detail in terms of your outlook for charges in the third quarter or the second half from restructuring?

Grant Beard

No, not really. I think that there is always the potential as we critically look at our fixed cost structure and as we continue to migrate activities into our own low cost environments in places like Southeast Asia or Mexico or to our supply base. There is always a potential to make a good investment that may require a modest charge, but we don’t have anything to put forward right now of order and magnitude.

Robert Schenosky - Jefferies & Company

And my final question is related to the Aerospace business. Many of the other companies that we follow have noted weakness or a lack of pickup in their business; can you talk about areas of strength for you and if you have any concerns related to the Aerospace business in the back half of the year?

Grant Beard

That certainly gets a lot of attention. I mean we right now have a record backlog in our business and some of that has been driven by our product expansion, so we’re getting a lot more content than we have in the past because of the broadening of our fastening product line. I think that the backlog for orders, for not only commercial but military aircraft is so substantial that while things are moving around a little bit it has no short-term or even moderate term variant on our outlook for our business.

Robert Schenosky - Jefferies & Company

Okay and you are willing to offer some sense of the break up between commercial and military in the backlog?

Grant Beard

Right now it’s probably two thirds, one third; maybe a little bit more than that.

Operator

Our next question comes from Alan Weber with Robotti & Company.

Alan Weber - Robotti & Company

On the total RV & Trailer Products, Recreational Accessories, can you break down what percent of that is directly tied to the RV business, whether it’s the aftermarket as you talk about customized product?

Grant Beard

That is a great question and regretfully somewhat difficult to answer because as we sell through two step distribution, it’s sometimes that it’s hard to follow where our product goes. I would say in the mid-teens but that would be an estimate.

Alan Weber - Robotti & Company

When you said mid-teens, what is mid-teen?

Grant Beard

Like 15%.

Alan Weber - Robotti & Company

15% is directly to ..

Grant Beard

Or indirectly; I mean we sell a fair amount of accessories around towing applications to wholesale distributors who in terms sell them to installers and it is a little bit hard at times to know if that towing package went on to a vehicle that’s a trailer for an animal or an agricultural application or a popup camper. It’s a little bit hard to follow that pull, but I think my numbers are pretty darn close.

Alan Weber - Robotti & Company

Okay and when you talk about the market being down, 15% and you were down 5%; that 15% then is what market?

Grant Beard

That really is an aggregate and I think frankly it’s a very conservative number. We track new Trailer registrations, which are down over 20% year-to-date. Again those trailers would service a whole range of end markets whether they be a construction, agriculture or for the general leisure market. We look at truck aftermarket and truck OE and applications and that would be factored into that number.

We look at the demand pulls from our wholesale distributors and what their experiences are. We try to track RV, OE activity in both sales and those type things and I would think that our 15 is a very conservative number. So, it’s an amalgamation of a whole bunch of different markets weighted to our exposure in those markets.

Alan Weber - Robotti & Company

Okay great, and my final unrelated question. The previous question was about the aerospace fasten your business and your backlog is up; can you kind of give a guess in terms of how long do you think that business should be able to grow?

Grant Beard

Well, right now there is a substantial commercial backlog and as aero planes are looking to displace the matter and put more composites in, we are going to pick up commensurate more content. The other thing that has happened is our average dollar per aero plane is going up with our new titanium product lines, really for the first time it’s taking us away from the structural skeleton of the aero plane and getting us into the fuselage wing and tail application.

So, we expect frankly to be able to grow for the short and medium-term faster than the underlying market and the military spend in sort of the advent of unmanned type craft is very good for us, because those are very high content for our type of fastening. So, I know I am not directly speaking to your question Alan, but we think the attributes, our products and where we are positioned are very favorable even though that the backlog of seven years of commercial aircraft might work down the four or five. We see a very good run way for ourselves in the short and medium-term.

Operator

There are no further questions at this time.

Grant Beard

Well if there are no further questions, we’d like to thank everybody for participating on the call and this concludes the TriMas second quarter call. Thank you.

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